MUMBAI, July 2: In a significant move to contain volatility on the stock markets, the Securities and Exchange Board of India (SEBI) has reduced the daily price band to eight per cent and replaced the weekly price cap with a graded margin system with effect from July 6, 1998.Lifting the ban on short sales with effect from July 6, the market regulator has reduced the daily price band from the current level of ten per cent to eight per cent and replaced the weekly price band of 25 per cent by a graded margin system with rates ranging from five to 40 per cent. This means the daily price increase/decrease in a scrip should not be more than 8 per cent in a scrip. If the price difference is more than 8 per cent, trading would be automatically suspended for the day.As part of the new margin system, any security whose price varies greater than 16 per cent plus or minus in a single trading cycle would attract a margin rate of five per cent, for variation greater than 24 per cent or more the margin applicablewould be 20 per cent, 30 per cent margin rates would be payable for 32 per cent variation or more and 40 per cent payable for variations greater than 40 per cent.According to a SEBI official, the restriction on short sales (which was limited to a day) and 50 per cent margin on shares in the no-delivery period would be lifted and simultaneously replaced by the new margin system. The additional margin of ten per cent levied on the end of the day sale position would continue to be levied till July 15, he said. The SEBI move to change the price band system and impose new margins follows big volatility in share prices and excessive speculation in several scrips like BPL, Videocon and Sterlite.SEBI announced the new measures after a meeting with the inter-exchange co-ordination group and inter-exchange surveillance group of the stock exchanges. Many exchanges complained that weekly price bands coupled with different trading cycles on various exchanges and differential prices created situations in which if ascrip reached the boundaries of a price band during a trading period, investors did not have any exit route in that scrip for the remaining days of the period. ``This situation put several brokers in trouble in the Sensex crash two weeks ago,'' said a BSE official. SEBI said the new volatility margins are in addition to the existing marked to market margins, daily carry forward margin, incremental carry forward margin, concentration margin and special/adhoc margins if any, SEBI said. ``A security would be considered as volatile if the price of the security varies by plus/minus 16 per cent or more in a single trading cycle,'' said a senior SEBI official.However, in respect of carry forward trades the cumulative margin on a security on account of the volatility margin and incremental carry forward margin would be subject to an upper limit of 50 per cent. The new volatility margins would not be mandatory for securities whose prices are less than Rs 40, SEBI said adding that it would be upto the exchangesto consider applying these margins in these securities also if it was deemed necessary.Moreover, price variations on account of calls, bonuses, rights, mergers, amalgamations and scheme of arrangements would be excluded for determining volatile securities and adjustments in prices when securities traded ex-benefits would have to be made for the purpose of computation of volatility, SEBI said.
